Surging Gas Prices Threaten One Of The Best Years American Farmers Have Ever Had

Brian Roach scrawled a simple outlook for corn prices in a spiral notebook, with a line diving from the upper left hand corner to the lower right.

Sitting in a hotel ballroom at the U.S. Department of Agriculture's annual Agricultural Outlook Forum last week, the commodity broker predicted increasing supplies and weakening demand would slow a boom in the farm economy that has fattened growers' wallets and pushed up food prices.

"Nothing is telling me to think any different right now," said Roach, president of the Florida-based commodity business Roach Ag Marketing.

For the first time in years at the conference that traditionally kicks off the year for America's agri-business sector, forecasters said the seemingly endless upward trajectory on everything from crop prices to farmer income was coming to an end.

The price of corn, the big daddy of the major U.S. crops, could fall 20 percent this year and because of expanding production globally, the corn stockpile would double.

It is a significant shift after corn prices reached a record high near $8 a bushel last summer on concerns about strong demand draining inventories. The surge in prices is expected to encourage an expansion in planting of crops this year.

Farmers are becoming "very pragmatic about the investments they're making in machinery, equipment and input costs" after spending freely following last autumn's profitable harvest, said Thomas Dorr, president of the U.S. Grains Council. Many built new storage bins and upgraded their tractors and combines.

Moving forward, "the mood is one of caution," Dorr said.

To be sure, farmers are flush with cash after farm income topped $100 billion for the first time in 2011 as the rural economy rebounded from the pothole of the global recession.

Even if income slumps to $96.3 billion this year due to larger world and domestic supplies as predicted by the government, farmers and ranchers would be looking at their second-best year ever. Income would remain well above the 10-year average.

"Prospects for U.S. agriculture continue to be strong with record income in 2011 and a strong balance sheet," said Joe Glauber, the USDA chief economist.

Still, there was a sense of deja vu of 2008 at the conference that attracts some 2,000 attendees. That year, farmers enjoyed sky high prices for their crops but marching in lockstep, was the price of crude oil.

The recent spike in fuel prices could again add pressure to the farm economy.

Energy costs squeeze farmer margins because they depend heavily on tractors, combines, pesticides and fertilizers -- which track the price of fuel -- to get most out of their land.

"Energy costs to a farmer are obviously a serious concern," said David Berg, president of the American Crystal Sugar Company, based in Moorhead, Minn. "It's almost like a few years ago where everyone was in a state of panic."

He said sugar beet farmers in Minnesota and North Dakota are doing well but a double whammy of lower prices on the market for the commodity and higher energy prices would be hard to swallow for a number of growers.

"The price of sugar is high enough so that an increase in energy costs is a negative for them, but it's not going to put them under water," Berg said. "If the price of sugar goes down from where it is today, it will very likely put some of them under water."

Tyson Foods also is worried about rising fuel costs, with Chief Executive Donnie Smith warning the recent jump in gas prices could dent demand for beef by reducing disposable income of consumers.

Beef prices have reached record levels due to a historic drought that reduced cattle herds in the southern Plains and high prices for corn that is fed to livestock.

"You're not moving as much volume of meat but you're paying more for it," Smith told reporters at the conference.

A drop in demand for meat could hurt livestock producers even as increased grain production would cut their feed costs.

Farmers are expected to go all out to get their seeds in the ground this spring, especially with the mild winter that is now coming to a close. The USDA estimates they will plant 94 million acres (38 million hectares) of corn, about 2 million acres more than last year and the largest area since 1944.

Still, Jon Caspers, a producer of about 8,000 hogs a year in Iowa, is not breathing a sigh of relief due to high gasoline prices and lingering uncertainty about demand.

He's also unsure farmers will plant as much corn as expected. Last year, heavy spring rains dashed their plans to plant from fence post to fence post.

"A lot of producers are waiting to see if it really happens," he said.